Reinsurance rate decreases to slow: concerns over reinsurers’ prudence

In pre-Monte Carlo briefings this week, Standard & Poor’s (S&P) and AM Best said that they expect market conditions to remain challenging for reinsurers in 2016. Both agencies have a negative outlook on the global reinsurance sector, as do Moody’s and Fitch. AM Best noted that global reinsurance capacity remains at an all-time high of around $400bn. $335bn of this amount is traditional reinsurance capacity with an estimated $60bn of alternative capital from sources such as hedge and pension funds. However, reinsurance brokers Aon Benfield and Willis Re reported this week that reinsurance capital has stabilised after years of growth. At a time of record capacity, demand for reinsurance is reducing, according to S&P’s reinsurance specialist and director Denis Sugrue. As primary insurers have grown in size and improved their risk management they are buying less reinsurance from fewer reinsurers, as well as looking to alternative capital providers.hideWith supply outstripping demand, increased competition has resulted in rate reductions during recent years. The rate of decline now appears to be slowing, according to AM Best and S&P. S&P said that rate reductions at the most recent reinsurance renewals in June and July of around 5% to 10% were not as severe as had been expected. Like AM Best, S&P still predicts further reductions in 2016, but at a lower rate of decline. The market has yet to ‘bottom-out’ but a return to some form of stability now looks possible, according to AM Best analyst Robert DeRose. “There will be continued pressure at the January renewal, but the rate of decline is slowing and both traditional reinsurers and alternative capital providers are saying that the risk reward trade off is no longer appropriate,” he said. In order for rates to increase, however, the market would need to suffer a ‘shock to capacity’, notably a catastrophe loss that went beyond modeller’s expectations, said AM Best. Mr DeRose believes a loss within expectations would attract more capital, but an unexpected loss might make alternative capital providers pause for thought. Reinsurers are clearly feeling the pressure. Both S&P and AM Best do not expect the healthy results of recent years, boosted by benign catastrophe losses and positive reserve development, to be repeated any time soon. Combined ratios have been deteriorating, especially for property catastrophe exposed lines and London market players, according to S&P. “The profits seen in recent years will be difficult to come by,” said Mr Sugrue. S&P predicts that average reinsurance combined ratios will be around 95% to 100% in 2015, deteriorating further to between 97% and 102% in 2016. Competition has also put terms and conditions under increased pressure, which could impact profits in the future. For example, the extension of so-called ‘hours clauses’ in contracts may open reinsurers up to greater losses. It is ‘unclear whether reinsurers have been imprudent’, said Mr DeRose. “It remains to be seen if the relaxation in terms and conditions has been as severe as some say. Prices are down and there has been a relaxation of terms, but most reinsurers say there is restraint,” he said. Competitive pressures and reduced opportunities for organic growth are driving a wave of mergers and acquisitions among reinsurers. “The consolidation wave has begun in earnest, with seven major transactions in the past nine months, the latest being Mitsui and Amlin,” according to Anvar Gabidullin, analyst at S&P. The cumulative value of these deals is $21bn, with an average 25% premium paid by the acquirer, he added. “Organic growth is difficult to come by. But these companies are also looking into the future and believe that to remain viable they need to achieve scale and diversity, as well as synergies,” Mr Gabidullin said. He believes that more deals are likely in 2016, although the list of target companies is shrinking. Moody’s, which also released its global reinsurance report this week, said the recent wave of merger and acquisition activity is unlikely to remove significant excess capacity from the reinsurance industry. “Moreover, mergers and acquisition involving primary companies, for example the ACE/Chubb merger, are likely to reduce the need for reinsurance, since larger combined entities will benefit from greater diversification and capital efficiencies,” it said. Despite a bleak outlook for reinsurers, S&P suggests that strong enterprise risk management and high capital adequacy means that most are in fact well positioned. Just this week the ratings agency upgraded SCOR SE to AA- from A+, citing the French reinsurer’s resilience to pricing pressure in the soft market. “We still see negative credit conditions, with high competition and declining prices likely to continue into 2016, putting reinsurers’ profitability under pressure,” said Mr Sugrue. “But reinsurers have responded appropriately and taken defensive action that should see them weather the storm,” he said. As a result of the defensive actions taken by reinsurers, S&P does not expect many rating actions in 2016.

Reinsurance rate decreases to slow: concerns over reinsurers’ prudence

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